Entrepreneurship: Key Concepts

Week 1.1

• Entrepreneurs enable individuals to transform ideas into commercial opportunities
• Entrepreneurship involves converting ideas into commercial opportunities while creating value
• Small businesses, defined as those with fewer than 500 employees, comprise over 99% of employers
• Small businesses contribute approximately half of the United States' gross domestic product
• Small high-tech firms create twice as many product innovations per employee
• Small high-tech firms secure more patents per sales dollar, compared to larger counterparts
• Most founders credit their firms' success to extraordinary ideas.
• Fads are unpredictable, short-lived, and don't significantly alter macro trends
• The "baby boom" generation includes individuals born in the US between 1946 and 1964
• E-commerce uses electronic methods to conduct business online
• Non-employer businesses started each year are reasonably estimated to be fewer than 100,000
• Studies found that about half of new firms remain active after four years

Entrepreneurial Traits and Business Longevity

• Recognizing and seizing commercial opportunities alongside a doggedly optimistic attitude, are traits shared by successful entrepreneurs
• Approximately half of new U.S. businesses dissolve or cease operations within four years of their start
• Fads are unpredictable, have short lives, and generally do not involve macro changes
• E-commerce includes environmental, electronic, economic and exploratory commerce
• The textbook emphasizes societal, demographic, technological changes, crises/bubbles, and emerging economies/global changes as sources of opportunity

Week 1.2

• The entrepreneurial finance covers less than 10 principles
• The "time value of money" relates to the cost of using someone else's financial capital
• A venture's financial objective should be more than just survival
• Free cash flow is the net income available to venture owners over time
• Free cash is not all cash avaliable to cover operating expenses
• Owner-manager conflicts arise from the manager's self-interest conflicting with the owners
• Entrepreneurial finance adapts financial tools to entrepreneurial ventures' planning, funding, operations, and valuation
• The second stage in a successful venture's lifecycle is the startup stage
• The startup stage is not followed directly by the rapid growth stage
• A common financial goal is maximizing the value of the venture to its owners, which is the entreprenuer and the venture equity investors
• Divergence with an owner debt-holder conflict increases as a venture nears bankruptcy
• A cash cow stage is not a life cycle stage of a successful venture
• Operating cash flows being generated does not describe activity during the venture's life cycle startup stage
• The survival stage is characterized is the time when revenues start to grow, and cash flows from operations begin covering cash outflows
• The textbook emphasizes seven principles of entrepreneurial finance

Week 2.1

• Financial ratios summarize financial data for comparisons using financial variables
• Second-round, mezzanine and liquidity-stage financing usually occur during the survival stage
• Investment bankers use financial ratios and measures during the rapid-growth stage
• Cross-sectional analysis examines a venture's performance against other firms at the same point in time
• Leverage ratios are used to understand the extent of ventures using debt and meeting debt obligations
• The equity multiplier is not an efficiency ratio
• Profitability and efficiency ratios are more important during the survival and rapid changes stages
• The interest tax shield is the portion of a venture's interest payment that is subsidized by the government because of interest deductibility
• How efficiently a venture controls is expenses and uses it's assets and debts is evaluated by profitability and efficiency ratios

Financial Models and Ratios

• The Return on Assets model does not include all of net profit margin, asset turnover, and the equity multiplier
• If a frim has positive net income, a drop in a venture's asset intensity ratio will increase it's ROE
• Investment bankers and commercial banks use financial ratios during the rapid-growth stage of a company's life cycle
• The entrepreneur, angels, and VCs use ratios and measures during all four stages
• Trend analysis of the methods used to examine a venture's performance over time
• Cross sectional analysis compares a venture against another from at the same point in time
• Gross profit margin: calculated by net sales minus coast of goods when divided by sales
• Net profit margin is net income divided by net sales
• Interest coverage determines the difference between a venture's ability to generate cash to pay interest by measuring the amount of interest needed
• "Inventory-to-total assets" is not a profitability and efficiency ratio

Financial Ratios and Analysis

• An increase in the asset turnover ratio implies a decrease in the asset intensity ratio
• Quick ratio calculation: A firm has total assets of $100,000, current assets of $30,000, inventories of $10,000, cash of $5,000, total liabilities of $30,000, current liabilities of $15,000, and notes payable of $2,000. The quick and NWC-to-Total-Assets ratios are 1.33 and .15, respectively.
• Nemo's Fish 'n Chips interest coverage for last year is $1.25 times, having sales if $85,000, cost of goods sold of $45,000, selling and administrative expenses = $25,000, deprecation and amortization = $7,000, interest expense = $12,000 and a tax rate of 30%
• A venture with net sales of $400,000, cost of goods sold of $200,000, operating expenses (selling, general, and administrative) of $100,000, and interest expenses of $50,000 has an operating profit margin of 25%
• Lenny's Lemonade had $3,500 in sales, and cost of goods sold was $2,000, depreciation expenses totalled $500 and interest expense was $700, and its tax rate is 25%. The net profit margin and NOPAT margin are 6.43% and 21.43%

Week 2.2

• Best practices of high-growth, high-performance firms are “developing new products or services that are considered to be the best" in marketing practices areas
• The best practices of high-growth, high-performance firms do not include "preparing detailed monthly financial plans for the next ear and annual financial plans for the next five years" in the marketing practices area
• The best practices of high-growth, high performance firms do include “preparing detailed monthly financial plans for the next year and annual financial plans for the next five years" in the financial practices area
• The best practices of high-growth, high-performance firms applied in the management practices area include "assembling a management team that is balanced in both functional area coverage and industry/market knowledge."
• Nonfinancial performance output measures do not improve the input measures
• An example of a non financial measure is customer complaints
• Companies should use nonfinancial performance measures when financial measures are calculated
• The balanced scorecard measures financial and nonfinancial performance, therefore reflecting the performance of the business

Financial vs Non Financial Information

• Nonfinancial accounting information is not used more often for longer-term operating decisions
• A non-financial measure is operating information that has not been translated into dollars
• The cost of controlling quality include prevention costs and internal failure costs
• Prevention and appraisal costs are costs of controlling quality
• Failing to control quality include external failure costs, but not prevention costs
• It is easier to quantify the cost of failing to control quality than the costs of controlling quality
• Spending more in costa of controlling quality will decrease the cost of failing to control quality
• Strong marketing practices are developing new and delivering high-quality products or service that command higher prices and margins

Management Teams and the Balanced Scorecard

• Effective entrepreneurial management teams do not need to include in-house accounting, auditing, and tax professionals
• The balanced scorecard includes financial and non-financial measurements, but not employee measurements

Week 3.1

• Monitoring financial performance, determining project cash needs, and obtaining first-round financing occur when it is a venture's survival stage
• First-round financing usually occurs during a venture's rapid-growth life cycle stage
• Short-term financial planning is critical during the survival stage because of operations not yet turning a profit and cash burn leads to an inability to pay liabilities
• During the rapid growth stage, cash shortages stem from the lack of operating profits to fund the needed working capital and fixed asset investments
• Short-term cash planning tools involve preparing a sales schedule, a purchases schedule, a wages/commissions schedule, and a cash budget
• Short-term financial planning typically involves preparing monthly financial statements and focuses on identifying and planning for net income demands on the business
• A cash budget features a venture's projected revenues and expenses over a forecast period
• Preparing monthly cash budgets for a full year allows the entrepreneur to determine if it is a cash need, the maximum size of the cash needed, and if the need can be repaid in the year
• Conversion period ratios represent the average time in days for certain current assets and current liabilities to convert into cash
• A venture's operating cycle doesn't equal its cash conversion cycle
• The cash conversion cycle refers to the amount of time it takes to convert a sale into net income
• The "cash conversion cycle" measures the amount of time it takes to pay off the principle on a loan
• A ventures cash conversion cycle will increase from the increase of the purchase-to-payment conversion period
• Short-term financial planning forecasts address whether a venture will generate the needed cash to meet coming obligations

Early-Stage Ventures, Seed Financing, and the Operating Cycle

• A firm is said to be an early stage venture when during the early-matuirty stage
• Seed financing is typically associated with a devlopment stage
• Suppliers are not paid in the form of being operated in the cycle
• A sale-to-cash conversion period measures the average days of sales committed to the extension of trade credit
• Inventory-to-sale conversion period is measured by dividing the average daily cost of goods sold into average inventory

Financial Metrics and Operating Cycle

• The purchase-to-payment conversion period measures the average time from buying materials and labor to receiving money
• The purchase-to-payment conversion period reduces the length of the cash conversion cycle
• A venture's operating cycle includes not only collecting on the sale and booking the sale, but all of the above
• The major difference with a venture's operating cycle and the cash conversion cycle includes the time to pay suppliers for purchases on credit

Week 3.2

• "Cash burn" is the cash a venture spends on operating, financing, and depreciation expenses
• "Net cash burn" occurs when cash burn exceeds cash build in a specified time period
• The "cash burn rate" is the cash burn for a fixed period of time, typically a month
• The term “cash build" is equal to net sales minus changes in receivables
• Liquidity ratios indicate the venture’s ability to pay short-term liquidities from short-term liabilities
• Net working capital reflects current assets deducted from current liabilities
• The current ratio and quick ratio differ because average invetories are subtrated in the denominator of the quick ratio
• Net working capital is a dollar amount measuring the cushion between current assets and liabilities
• Total debt doesn't include retained earnings
• During a venture's development and startup stages, key financial ratios and measures are cash burn rates and liquidity ratios

Financial Health of a Venture

• Important users of financial ratios and measures during a venture's development and startup stages include the entrepreneur, business angels, and venture capitalists (VCs)
• During the survival and rapid-growth stages, leverage ratios are more important compared to development and startup stages
• Accounting rules mandate classifying current maturities of long-term debt obligations as short-term liabilities
• "Cash build" is assessed as sales and reduced or increased receivables
• "Net cash burn" is cash burn minus cash builds
• The average monthly net cash burn rate cannot be $3,000 with $20,000 annual net income, $10,000 annual interest, $150,000 annual cash build, and $186,000 annual cash burn
• A firm has net sales of $150,000, net income of $15,000, beginning-of-period accounts receivable $60,000, end-of-period accounts receivable of $90,000, and interest of $10,000 has cash build of $120,000
• Quick ratio is the average current assets minus average inventories when divided by average current liabilities

Week 4.1

• It is false that long-term financial planning begins with annual working capital needs
• It is easier to forecast for firms with operating histories than forecasting for early-stage ventures
• A customer-driven approach does not primarily provide forecasting of industry sales growth rates
• Sales forecasting accuracy is lowest during a venture's development stage in its life cycle
• The rate at which a firm retains business profits grows as the sustainable sales rate
• When at a 100% retention rate, firms have their maximum sustainable sales growth rate
• AFN and "Additional funds needed" is the existing gap between final capital and retained earnings
• Increased AR & AP accompany spontaneously generated funds from increased sales
• Forecasting sales projects costs and balance items at the same growth rate as sales
• Applying "The constant-ratio forecasting method", is a variant of the “percent-of- sales forecasting method"
• Projected cash flows serves as a check for projected income statements
• A firm's sustained growth rate is $18.75% out of projected net income or $500,000 or tends to pay the $125,000 in dividends and has equity of $2million

Sales Growth and Funding

• Retention of profits refers to sustainable sales growth rate
• To estimate how a venture's sustainable growth rate: given that Net income = $200,000; Total assets = $1,000,000; equity multiple based on beginning common equity = 2.0 times; and Retention rate = 25% The answer is 10%
• A venture's sustainable sales growth rate is 20% if common equity was $50,000 at the end of last year, and it was at $60,000 at the end of this year
• By receiving a given firm and and a "financial policy" multiplier, sustainable growth should be 20% and net profit margin is 2 tiems with a asset turnover of 2%
• The financial funds, that are needed after asset growth and increased earnings, are additional funds needed

Financial Forecasting

• The percent-of-sales method is a forecasting method used to project financial statements

Week 4.2

• Early-stage ventures in their development, startup, or survival life cycle stages
• Business angels are wealthy individual investors who have venture financing
• Mezzanine financing keeps the venture afloat until the following offering.

Entrepreneurial Finance

• "Risk and expected reward goes hand and hand"
• Financial bootstrapping does not have maximum need for financial capital
• During their investment stage, some business angles launch but have small financial gains
• First-round financing occurs during a venture's survival cycle

Venture Financing and Markets

• Seasoned financing is not a type of venture financing
• Private financial markets have custom securities that are not transferrable under contracts
• "Stock and bond markets" isn't seed or start-up financing
• Business angels are wealthy and invest in share of financial rewards
• Ventures life cycle is early staged through business angles

Week 5.1

• Sarbanes-Oxley's purpose is not to improve financial reporting
• The interal control objectives are to ensure accurate financial reports, and ensure compliance with the applicable laws
• Sarbanes-Oxley requires internal controls and ensures that company's statements aren't fraudulent
• All public companies must report on management's conclusions about internal control procedures
• All employees should have the attitude and awareness in internal controls
• Handling is separated when an example includes the control procedures of purchasing, receiving, and paying from equipment.
• Through the separation of transaction control, internal control is more accurate

Internal Controls

• A backlog of recording transactions is an example of warning sign from the accounting system
• Behavior analysis represents an element of internal control
• Proofs and security measures are not a factor that influences control over an environment
• A firm adheres to monitoring internal control elements when they use auditor's
• Reasonable assurance that operations are managed to achieve goals
• A responsible employee and that is a weak internal control
• Procedures are to protect assets, control directing operations, and ensure information is accurate
• Controlling the internal environment through monitoring

Elements of an internal control

• Risk Assesment is an element of internal control
• Data systems are a necessary element during internal communications
• A direct company is a Board of Trustees through the company's internal system